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Asia FDI Forum IV - March 22-23, 2018

Special Economic Zones: Issues and Implications for International Law & Policy

Concept Note

In 2015, the world counted about 4,300 SEZs and their number is steadily increasing. China established the first SEZs in 1980, and their success, in particular the one of Shenzhen, inspired other countries to follow China’s example. India set up the first Asian Special Economic Zones in Kandla in 1965. Singapore, Malaysia, and the Philippines started their SEZs between 1968 and 1972. Nowadays, ASEAN Member States have widely adopted the SZEs model, establishing more than 1,000 SEZs and recognizing their vital role in the development of the ASEAN Economic Community. In December 2015, Japan adopted The Law on National Strategic Special Zones as a part of the regulatory reform and more generally as part of “Abenomics”, the economic policies advocated by Prime Minister Abe in 2012. In 2016, Dubai Multi Commodities Centre was awarded “Global Free Zones of the Year” for the second year running, thanks to the constant support the United Arab Emirates provide for investors. In 2017, the Vietnamese Planning and Investment Minister announced the establishment of three ‘outstanding’ SEZs, in the north, center and south of the country, that will offer investors greater incentives and fewer restrictions than those available to date in the country.

As a development strategy, SEZs have benefited both advanced economies, developing countries and transitional states, with emphasis ranging, in turn, on export (as in the Export Processing Zones in Bangladesh), financial liberalization (like in the Shanghai Free Trade Zone), or industry-specific policies (as in industrial parks for logistics, energy and telecommunications). Hence, the establishment of SEZs as a policy tool has greatly contribute

d to transformation and growth of Asian economies. However, SEZs are not a cost-free miracle promoting economic growth. In fact, although fiscal incentives can represent a fine start for SEZs, in addition to creating distortions within economies, they are not a sustainable option as they are not in line with the liberalization inherent to the SEZs scheme. At heart, SEZs embody a testing ground, within the territory of states, for bold reforms aiming at a more liberal economic policy and a more efficient administrative procedure. It derives that both local and international companies investing in an SEZ will obtain a comparative advantage with respect to companies investing in other areas of the same state. Ultimately, projections of SEZs are to boost overall competitiveness of a country or a region. It is therefore necessary to elaborate a legal and regulatory framework to guide SEZs’ development and ensure that they are properly designed, in order to successfully attract businesses and stimulate growth.

From the perspective of international trade and investment law, SEZs are not directly governed by WTO trade rules, but the SEZs incentives may be covered by the WTO Agreements. As a consequence, the relationship between SEZs and some WTO Agreements, such as the Agreement on Subsidies and Countervailing Measures, the General Agreement on Trade in Services and Agreement on Trade Related Investment Measures, and free trade agreements including provisions on the functions and treatment of SEZs may raise legal issues. Furthermore, under SEZs, the application of certain state laws can be exempted: in order to attract investment, the standards of labor and environmental laws can be lowered, and this contrasts with the current tendency of attributing greater importance to quality rather than quantity of investments. In fact, with this aim, states are introducing some changes in their foreign investment policy, for instance issuing new rules to protect the environment and labor rights, and address tax avoidance. These changes may contravene to specific provisions included in international investment agreements aimed at the protection of foreign investment, and thus induce foreign investor to allege breaches of international obligations before investment tribunals. Such discrepancy is one more reason to rethink of the SEZs regulatory framework.

It is time to take a closer look at magic and myth of SEZs. In light of these developments, the Asia FDI Forum IV will provide a multi-stakeholder platform for participants from academia, government, the private sector and civil society to discuss regional trends in SEZs, highlight specific features of Asia’s SEZs, explore the relation between SEZs and investment treaties, and discuss the various policy implications of the above.

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